A Theory of IPO Waves
36 Pages Posted: 18 Mar 2005
Date Written: May 15, 2006
In the IPO market, investors coordinate on acceptable IPO price based on the performance of past IPOs, and this generates an incentive for investment banks to produce information about IPO firms. In hot periods, the information produced by investment banks improves the quality of IPO firms, and this allows ex-ante low quality firms to go public and increases the secondary market price, thus synchronizing high IPO volumes and high first day returns. When investment banks behave asymmetrically in information production, the reputations of investment banks are interpreted as a form of market segmentation to economize on the social cost of information production.
Keywords: IPO, Certification, Underpricing, Hot and Cold Market, Reputation
JEL Classification: G24, E32, D82, C73
Suggested Citation: Suggested Citation